Coinsurance Demystified

Coinsurance can be a tricky subject and outside of preparing an ITV in Xactimate, most adjusters are not often faced with how to properly calculate and document coinsurance, let alone apply penalties and communicate with the insured regarding proper documentation. In this article we are going to very briefly take a look at coinsurance, how it's defined and run through some basic calculations for property losses. At the end, I'll also introduce you to our brand new Coinsurance Calculator!

Let’s start by looking at the most basic coinsurance issue…

Does coinsurance apply to the loss I am working?

Most commercial policies have a coinsurance provision that must be adhered to by the insured. Coinsurance is a condition of the policy that allows a lower limit to be reflected for the building in exchange for the insured’s promise to be a co-insurer of that building. In other words, in exchange for lower premium, the insured is promising to self insure a percentage of the risk. If you have ever had to explain this to an insured (especially where penalty is involved) you know that most agents neglect to mention this condition quite as revealingly when selling the policy.

Anyhow, on to the calculations. Coinsurance percentages vary from policy to policy, coverage to coverage and can even vary from building to building. The dec page of the policy should show you the applicable percentage as a basis for your calculations. It is not uncommon to see eighty, ninety or one hundred percent coinsurance provisions. Here is a how it works:

Let’s say we reviewed the policy and have noted an 80% coinsurance provision for the affected building, as noted from our dec page below:

There is a Limit of Insurance for this building (described as Location 1, Building No. 1) in the amount of $400,000. Keep in mind, this figure can never increase or decrease without endorsement, so your coinsurance calculations will never change this number.

Let’s do some math!

We need to determine how much the insurance is required in order to stay in compliance with the 80% coinsurance provision and avoid a penalty. This is done by preparing a Xactimate Commercial Insured to Value (ITV) Report, which prints out a couple of numbers for your use:

In the example above, we have determined our building is worth $489,889.48 (RC). Our coinsurance percentage of 80% from the policy is used to determine how much insurance should be carried, like so:

$489,889.48 x 80% = $391,911.58

Whenever the amount of insurance that should have been carried, in our case $391,911.58 is less than that of the building limit ($400,000.00), the location is in compliance. The amount of insurance carried exceeds that of the requirement.

But what if it doesn’t?

Same example as above, but let’s say there was a 90% coinsurance requirement instead. Here’s the math:

$489,889.48 x 90% = $440,900.53

Uh oh. The insured is not carrying enough insurance on this location and any covered loss is now subject to penalty. This penalty is calculated by taking the amount of insurance purchased and dividing it by the amount that should have been carried and multiplying the resulting number by the loss amount, then subtracting the deductible. Sounds complicated, but it’s not, here is the math, assuming a loss of $30,000 and $1,000 deductible:

That penalty multiplier is calculated by dividing the amount of coverage by the itv total after reflecting the percentage required: $400,000.00 / $440,900.53 = 0.907

So, for the purposes of reporting, your coinsurance statement would likely read like this:

We have prepared a commercial ITV for the damaged property and have determined the value of the building to be $489,889.48. The policy coinsurance requirement is 90%.

The insured is not in compliance with the coinsurance requirement and the loss is subject to penalty as follows:

We have prepared a commercial ITV for the damaged property and have determined the value of the building to be $489,889.48. The policy coinsurance requirement is 80%.

The insured is in compliance with the coinsurance requirement

Introducing a tool to make it easier!

Now that we've taken a look at how to calculate coinsurance, how about a tool that will make this work a little easier? Our coinsurance calculator is here to save the day! Designed for ease of use, this little tool will take all the things we've already discussed into account. Plus it includes language that you can tweak and put into your report and will also let you deduct for items not covered. Be sure to check it out here.

Keep in mind, coinsurance can be affected by the loss settlement; meaning, does this policy pay for losses at ACV or RCV. Also, coinsurance is cancelled or waived by certain policy endorsements and provisions. Most carriers will also agree to pay ACV in lieu of an RC payment less applicable penalty. This is the option of the carrier of course. I hope you enjoyed the article, be sure to check out the tool!

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